How the Post-Money SAFE (Simple Agreement for Future Equity) works
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- เผยแพร่เมื่อ 2 มิ.ย. 2024
- Unlike the original pre-money SAFE - Simple Agreement for Future Equity - the 2018 post-money SAFE uses a post-money valuation cap. The SAFE is a very popular startup funding vehicle. Both versions can (but don't always) result in the SAFE investor receiving SAFE Preferred shares upon the equity conversion. These are very similar to standard preferred shares, but with differences in liquidation preference (we show a simple liquidation preference example using a 1x participating liquidation preference), conversion price, and dividend terms.
The SAFE agreement valuation cap is the biggest differences in the two versions. The video walks through a Simple Agreement for Future Equity example cap table to show exactly how post-money SAFE funds convert to a committed percentage of ownership, and how that results in founder equity dilution.
Differences in pro-rata participation rights are also discussed.
Compared to the convertible note, the SAFE has no interest rate and no maturing date, so it is simpler and more entrepreneur friendly than the convertible note.
This StartupSOS channel provides practical, how-to advice for new entrepreneurs who plan to build a growth startup with investor funding. - แนวปฏิบัติและการใช้ชีวิต
Time to watch it 3 more times
lol seriously
This is the best video about SAFE on TH-cam. Everyone knows what is SAFE is & the terms. I couldn't find any video to show how the process really happens. Thank you sir!
Glad it was helpful!
I have been looking for so long for a video like this, thanks so much for making this!
Thank you for the actual examples of walking through the math! That helped clarify so many things for me!
Thank you for breaking this down in an easy-to-understand way!
Glad it was helpful!
Super clear and helpful, thank you!
Thank you so much for this video. Y Combinator has some great content, but I was absolutely LOST in their explanation of this. I'm sure my lack of math skills didnt help either lol
Thanks - I hope my version of the math was easier to understand!
@@Startupsos it indeed was!
What is this company
SO INCREDIBLY HELPFUL THANK YOU !!
Thanks Jonathan
Outstanding! Thank you! Keep up the great work! Thanks!
EASY , SIMPLE AND PRECISE , Thanks for video .
You are welcome
Thank you for this service!
Thank you too!
Wow. this was helpful.
I love this!! Thanks again!
You are so welcome!
Exceptional video, thank you very much!
Glad you liked it!
Great great great video and very clear simple clever way of explaining
Very helpful, thank you!
Thanks sir for your valuable speaking.
Thank you so much for this and your prior two videos about Notes and the Pre-Money SAFE. Incredible resource and everyone on my team is incredibly appreciative.
You are so welcome!
Thank you brother 😩🙏🏾🙏🏾🙏🏾
You are most welcome!
Nice job, Steve (@StartupSOS)!
Thanks Clint.
Can you please dig more into the details of "discount" and "pro-rata" in post-money SAFE?
Outstanding video. Thank you. Quick question, what is the impact when the investor wants both a valuation cap and a discount on the Post Money SAFE?
In the round that converts the SAFE, they get the benefit of either the discount or the cap - whichever gives them the best deal.
Amazing video
Thanks!
Thank clear and súper helpful
Thanks!
Great video. The example was extremely helpful. However, at the end of the Series A I lost understanding on the following points since the math wasn't spelled out as it was in the early sequence of the example:
(1) What was the math that landed Investor B with 1,625,127?
(1a) How do you know what to allow for a pro-rata investment to prevent Investor B from exceeding 10% ownership?
(2) What was the math that landed Investor C, who invested $4M, with 448,673? (Assuming $4M / $1.1144?)
(3) How did you determine what the "other investors" put in ($1M??) to end up with 448, 673?
(4) How did the option pool end up with 2.445M shares? Specifically looking for the math.
(5) Why did the total cap reach 17.946M shares instead of 16.251M? (I came up with that based on cap at end of the SAFE round + additional shares computed for the Series A round)
Check out the Video "Share Dilution Spreadsheet: Y Combinator Post Money SAFE" which goes through this same example in detail - and with a spreadsheet you can download.
Hi Steve, thanks for your video. I have a question about the video.. You mentioned that the SAFE preferred only happens when they pay less than the equity round investor, however, I found that the language of Qualified Financing or Equity Financing that triggers conversion doesn't relate to the price. The only requirement seems to be bona fide financing but not how high the valuation is regarding the first equity round. Then if the price per share in the first equity round is lower than the SAFE price, I think it still triggers the conversion automatically even if the SAFE holders are not willing to do so. Thus, does it mean that the SAFE preferred happens all the time no matter SAFE holders pay less or more than the equity round investors? Thanks!!
This is incredibly helpful - thank you!! Do you have any sort of spreadsheet/template to play with for both a pre and post-money SAFE?
I have been working on a spreadsheet, but it's not ready yet. I hope to finish it over the holidays.
@@Startupsos Please heads-up when you finish it! Thanks!
StartupSOS any word on that spreadsheet? Please send a copy elvin@smartrealty.net
@startupsos did you have a chance to finish the spreadsheet?
Thank you for wonderful explanation in simple term. Would it possible to share excel for cap table explained here? Thank you
I'm testing a spreadsheet to analyze the cap table impact of multiple Post-Money SAFEs right now, and hope to get it posted in 1 or 2 weeks.
Thanks Steve. Do you have an excel example for this post-money SAFE as you had for pre-money Safe? I would be nice!
Yes - check out the video about the Post Money SAFE dilution spreadsheet.
To: StartupSOS
Firstly, it was informative to be in contact with your channel. Thank you for your education for startups.
Now,
I request you to PLEASE take this SERIOUS to verify my doubt or maybe your mistake for an scenario that you explained.
Here is the issue that to be clarified:
In the beginning of the example we assumed "POST MONEY CAP IS LOWER THAN PRE-MONEY VALUE - which will make safe preferred share kick in to provide better price per share for safe investors (Time of explanation of this scenario in video is from 6:50 minutes to 7:10 minutes)"
However at the end @ 14:18 minutes to 14:38 minutes, you said "Now, if there is no discount and if the POST MONEY CAP ENDS UP BEING LOWER THAN THE PRE-MONEY VALUATION in the round, then there is no difference in price and the safe investors actually converts their fund into same preferred share as the Series-A investors".
Can you please verify was those two terms (one in beginning and other at near end, as i said above) are different or was it a error in explanation? Because,
first with valuation cap on investment you said- if
POST MONEY VALUATION < PRE-MONEY VALUE IN EQUITY ROUND, than the SAFE PREFERRED SHARE WILL PROVIDE BETTER TERMS for safe investors
then you said- if THERE IS NO DISCOUNT and if the
POST MONEY CAP < PRE-MONEY VALUATION, then there is no difference in price and safe investors get the same price per share as equity investors.
Please reach me out as a reply to my comment here or to my personal email (msnaveen.sidhu25@gmail.com) , I'm in need of your help now. I hope you help me get clarified. Thank you!
Sorry - my error - I misspoke at 14:38. I was giving an example of how SAFE shares are issued if the SAFE price is lower than the price other investors pay - which happens if the Post-Money cap is less than the pre-money valuation - but if the post-money valuation is higher (NOT lower) than the pre-money valuation, and there is no discount, then the SAFE investors are not paying less than the other investors and they will not receive SAFE shares.
@@Startupsos Thank you! Appreciate your response. If you can explain the liquidity preference and dividend rate of Post -money Safe in detail with example, it would be much helpful. Thank you!
Hi, you are a very good teacher. It's not that easy to do
Thank you! 😃
Hi, wonderful video, can I ask how you got the number 1,695,000 shares for the options?
I go into the numbers in more detail (for the same example) in the video "Share Dilution Spreadsheet: Y Combinator Post Money SAFE". The short answer is that the Series A lead investor requires that once the Series A investment is completed that 10% of the fully-diluted stock in the company be allocated to the stock option pool. In the existing capitalization there are 750,000 shares of stock allocated for options, and 650,000 of those are committed, so 100,000 are available. Buy adding an additional 1,695,000 shares the total number of available options is 1,795,000 which is equal to 10% of the fully-diluted capitalization of the company, meeting the option-pool requirement set by the Series A lead investor.
Thank you for the very information example. Are you sure that the 'Others' (Series A investors - Investor C) add up to 2.5% and 448,673 shares. Should it not be 5% and 897,314 shares since 'Others' have contributed 1M of the 5M raise or a quarter of what Investor C has contributed?
Remember that investor B used their pro rata right to purchase more stock in the round, so part of that remaining $1 million investment was from them, and the rest was from the other investors. So the investment from the other investors was closer to half a million, which is why they came in at 2.5%
Hi Steve, any chance you can answer these two quick questions?:
1. Are pro-rata issuances calculated on the right holders issued/outstanding ownership or on a fully diluted ownership basis?
2. Do prior investors with pro-rata rights get pro-rata on both the SAFE conversion, and the subsequent seed round? If so, in the SAFE conversion, do they get calculated on top of the round (because it is post-money and the ownership percentage is guaranteed?) I would assume it would not be apart of the round like is the case in priced round financing.
I appreciate it big time!
These are excellent questions to ask your emerging business attorney to be sure you get a correct answer! But here is my understanding (not legal advice - just my understanding.)
Question 1: Assuming all the early investors are post-money SAFE investors, you can think of all of the SAFE investments taken together as being a "SAFE funding round". In that round, the post-money value for each post-money SAFE investor and the amount they invest determines what percent they will own after that SAFE round. Simply divide amount invested by post-money value. So the pro-rata does not apply to the SAFE round, only to the priced round that converts the convertible securities to stock. As to the question of fully diluted basis for the conversion to stock, the pro-rata side letter provided by Y-Combinator says investors with a pro-rata right "shall have the right to purchase its pro-rata share of Standard Preferred Stock being sold in the Equity Financing..." It does not state all the conditions for that sale - for example: can the company dilute the SAFE investor by issuing more stock into their option pool after the pro-rata stock purchase? I don't know - it doesn't say! So conversion basis probably depends on what is in the side letter. Y-Combinator's own example shows the pro-rata shares being diluted. (That does seem to me to violate the spirit of a pro-rata.)
Question 2: Assuming the prior investors are post-money SAFE investors, then the post-money value and the amount they invest determines their ownership in the SAFE round - no pro-rata right needed. And keep in mind that every SAFE investor can potentially get a different post-money value (especially if the invest at different points in time). And as in the answer to question 1, when it comes to the priced round that converts the SAFE to stock, if a post-money SAFE investor has a pro-rata right, how it converts is determined by what the pro-rata side letter says. In theory, some could convert on a fully diluted basis (and actually maintain their percentage ownership in the priced round) and others might get diluted by the increase in the stock option pool. If I were doing a pro-rata right side letter, I would make a point of making it clear exactly how the pro-rata conversion will work. Without a clear definition, lawyers get to interpret it! But again - I'd suggest you ask an attorney.
@@Startupsos Hi Steve, thank you so much for your reply. I think the only thing that is unclear to me now is if an investor who came in on a previous round before the SAFE would have pro-rata on the SAFE shares, and again on the priced round shares that made the SAFE convert? And if so, would the pro-rata for existing investors be on top of the safe or apart of the round? (seeing as the % ownership was guaranteed in a post-$ SAFE, I would assume over and above, and not built into the SAFE round?)
Thanks so much! I apologize for bothering you again!
Also this is assuming that the prior investors are not post-money SAFE investors but Preferred share investors.
Do the Pro-Rata rights allow for investors to buy more than their guaranteed percentage of initial ownership?
how are Safes recorded if not in the cap table or in the accounting system as debt? what if 6 months go by and Fonder has died who knows of the safe if it's not recorded? When money is deposited what is it called for accountants and lawyers?
These are good questions for your accountant - but here is my non-accountant understanding. Typically, a SAFE is treated as a Forward Contract - a contract to purchase equity in the future, and as such would appear as a liability on your balance sheet. On the other hand, it might be treated as an equity, especially in the case of a post-money SAFE and especially if a conversion event is imminent such that there is a fairly clear expectation as to what percent of the company will be obtained at conversion.
I am curious - why does investor B get diluted to 9.1% if he/she is exercising their 10% pro-rata. Shouldn't they remain at 10% ownership? Thanks Steve!
Yes, one would think it should be 10%. And it could result in an awkward discussion with investor B if they really did expect 10%. But I stuck with the calculation that Y-Combinator used in their documentation, and in their example, investor B is able to purchase more stock to get to 10% before the additions to the stock option pool are taken into account - and then investors B is diluted by the required increase in the stock option pool. But there is nothing etched in stone that says it has to be that way. If the pro-rata had stated that the 10% was to be maintained even after increases in the option pool (and if the lead investor in the Series A went along with that), then that would change the calculation. But that would further dilute the founders, so the founders would prefer to have the calculation work as shown.
@@Startupsos Thanks Steve. I have a couple other quick ones :
1. Are pro-rata issuances calculated on the right holders issued/outstanding ownership or on a fully diluted ownership basis?
2. Do prior investors with pro-rata rights get pro-rata on both the SAFE conversion, and the subsequent seed round? If so, in the SAFE conversion, do they get calculated on top of the round (because it is post-money and the ownership percentage is guaranteed?) I would assume it would not be apart of the round like is the case in priced round financing.
Thank you very much for your help!
The whole point of the safe was to avoid the valuation problem. What will be the difference between for the founder. When you say you are raising 1MM at a 20MM valuation cap. and raising 1MM at a 10MM valuation cap. Will he get more diluted in the latter
It depends entirely on the valuation of the later priced round (lets call it the Series A). Assuming this is a post-money SAFE, then a $1MM investment at $20MM post-money valuation guarantees the investor that in the SAFE round they will get at least 5% of the company in the "SAFE round", whereas the other investor ($1MM at $10MM post-money) is guaranteed to get at least 10% of the company. The price each pays is determined by their respective post-money caps. But then the Series A priced round happens and the pre-money value of that deal determines the stock price of that round. If the Series A share price is lower than either SAFE investor paid, then the SAFE investors both get that lower price, and they each cause the same dilution (because they each invested $1MM). But if the Series A price ends up being higher than the SAFE price paid by the $10MM cap investor then that investor pays the lower SAFE price determined in the SAFE round and the SAFE investor with the $20MM cap will pay a higher price. So in that scenario the SAFE with the $10MM cap causes more dilution than the SAFE investor with the $20MM cap.
forgot to add link up there on the minute 15
how did you calculate the number of shares investor B gets to bring him to 10%? it is not 10% of the 17,946,291 total shares
Check out my Post-Money Safe Dilution Spreadsheet video - it goes over the same example in detail. But the short answer is: every deal can be different (it depends on the terms) but this example follows the example Y-Combinator provided, and it assumes that although the SAFE investors exercised their pro-rata right to purchase more shares along with the new investors, they were still diluted by the additional stock options that were issued to expand the option pool, so their pro-rata got them closer to but not quite up to 10%.
Hi, I have a question, I want to allocated 40 percent of the business to an Angel. I will maintain 60 percent. But as an incentive to the Angel, any shares given to loyal staff if we hit the targets of year 1, can come from my shares, also in the future round 2 of funding, any shares will also come from this 600 000 share pot. The incentive being, during the growth period, the Angel maintains the shares put in.
If we start we 1000 000 shares and I allocate 40 percent that’s 400 000 shares, if we decide on giving 2 staff members 2 percent at the end of the first year, that equals 12000 shares per person, leaving 576 000. I s there any need to allocate New shares to allocate this 2 percent and if so why please.
You can certainly choose to allocate shares for employees from your 60% so that the angel is not diluted. But at some point, you might want the angel to share in the dilution. The idea is that as you create more value in the business, the angel's stock becomes more valuable even as the percentage declines. Otherwise, you are absorbing all the dilution. Another drawback of providing a fixed percent ownership to one angel is that it can make it difficult to attract other investors in the future.
@@Startupsos Great advice! I have a think, I'm trying to put a decent size hook and bait on this because I need to raise the finance fairly quickly, New Food Apps are Ubiquitous, and growing by the day, but as you advised, we expect pretty quick growth, and the Investor should really share that Dilution, maybe i'll advise the Saff shares can come from me and any Future round must include the investor. Hey thanks
How did you calculate the 4,486,569 of additional shares needed for the 5mm investment?
That is the number of shares which, when multiplied by the share price of $1.1144 nets a total of $5 million
@@Startupsos I think the question was asked precisely because 4,486,569 x $1.1144 does not get $5million. 4,486,569 x $1.1144 = $4,999,832.49 (which is $168 short).
$5million / $1.1144 = 4,486,719 (not what is shown in the video of 4,486,569)
More specifically, Price per Share = $5million / 13,459,705 = $1.114437501
So $5million / $1.114437501 = 4,486,568.33 ---> Which basically is what is shown in the video
Hope this helps others.
Side note: this follows the YC example closely, but frustratingly the YC example video is also slightly wrong (10% for options pool post money should translate to 1,694,570 additional shares instead of 1.695 million). All these rounding numbers contributed to numbers that are off by hundreds in the end.
14:21 - did you mean to say "post money cap ends up being _higher_ than the pre-money valuation"?
Good catch - yes, I should have said "post money cap ends up being higher..." Thanks! If the post money cap is higher than the pre-money valuation then the SAFE holder will go with the lower price determined by the pre-money valuation, and will not receive SAFE preferred shares.
@@Startupsos Thank you for your response. I love your videos! You really have a talent for clearly explaining these intricate technical scenarios.
If you Add Shares in future rounds, doesn't that dilute the price and % of ownership that original investors have? I'm sure they wouldn't like that.
Yes, future rounds dilute earlier investors (and founders) which is something that investors realize. You can only guarantee an investor that they will get a certain percentage in the current round. If they have a pro-rata right, they do have the ability to invest in future rounds to maintain their ownership. Although dilution is a reality, the idea is that if the company value grows faster than the dilution, then everyone wins - and that's certainly the goal.
Can you please send d me a simple book like "safes for dummies "and I practice it better. Thanks am new to your channel and watching all the way from Uganda
I wish I had such a thing! I hope the videos help some. The videos that come with a spreadsheet for analyzing specific scenarios might be helpful too, since those get into concrete examples
@@Startupsos thanks slot let me follow up with the video
Please keep this up totally helpful
Too complex for me to understand 😂